Seeing strong demand in rural markets: Maruti Suzuki

Moneycontrol Bureau

The overall sentiment in the auto industry remains bad, but growth in rural markets has been strong, Mayank Pareek, Maruti Suzuki's managing executive officer, marketing & sales, said on Monday. There has been a continuous decline in volumes in the last 4 months, and diesel vehicle sales are also down as the cost of ownership (high fuel prices, expensive loans) has gone up, Pareek told CNBC-TV18.  "I think difficult is the statement. It is all worst time auto industry has seen in long time," he said. Also Read: Maruti names Kenichi Ayukawa as CEO as Nakanishi retires The rural sales, however, are up 19 percent this year, he said, adding that the company started focusing on the rural markets during the slowdown in 2008, and this rural push has helped it gain market share. Rural markets now contribute to as much as 28 percent of Maruti's total sales, compared with just 4 percent in 2008, he added. Domestic car sales plunged 26 percent to a 12-year low in Feb, according to data published by Society of Indian Automobile Manufacturers. Maruti's sales declined 8 percent year-on-year, last month. The company has already halted production twice this month in the wake of the slowdown. Pareek said the company would continue with its strategy to control inventory by stopping production on select days, instead of pushing stocks up at the dealers end, in the wake of the sluggish retail demand. Many auto companies have started discounts and special offers on their cars to lure customers. Pareek noted that the discounts are at an all time high and so this could be a good time to buy cars. Below is the verbatim transcript of his interview on CNBC-TV18 Q: How difficult is it now on the ground because we have been getting some fairly scary numbers since February? A: It is a worst time that the auto industry has seen in long time. Last month the passenger car segment declined by 26 percent. Basically, there are three sectors of the vehicle segment. One is passenger car, which is an ‘A’ segment, which declined by 26 percent. Second, which is a ‘B’ segment, is sport utility vehicle (SUV), which is recording robust growth of more than 50 percent and ‘C’ segment, which is a van segment, which has declined by 2-3 percent. So, ballpark for the year, the industry will show around 4 percent growth but numbers for last four months have been scary, in fact last four months successively industry has declined. If you divide the industry into diesel and petrol, then there is a significant shift into diesel and petrol in the last couple of years. This year while petrol has declined by 17 percent in April-February, diesel has grown by 27 percent. However, for the last four months, even diesel has started declining. In fact in the month of February, the aggregate diesel demand dropped by 5 percent. Therefore these are scary and bad times. Q: Your Company has done better in the past couple of difficult months in the context of an industry that is suffering as you said. If you had to set out the path for this calendar year, how is it looking? A: So far it has been tough and going forward too, I do not see the basic triggers going into positive zone. For example generally, the sentiments are bad and for a category like car, people buy when they feel good about it. Secondly, ownership of a car has become more expensive. Since 2010, petrol prices have gone up by 33 percent and diesel prices have gone up by 28 percent. As a result the cost of running a car has gone up. Also on the interest rates front, around two years back a car customer could get a loan at around 8 percent that is the retail interest rate and now it has gone to around 12-13 percent. So, cost of ownership of a car has become really high. As a result you see the slowdown. We as a manufacturer have performed well, we have gained market share. Mainly because of the small things we have done. We have been able to segment the market in such a way that we have been able to locate some pockets in the market, which are showing growth. For example despite overall degrowth, rural markets have grown by around 19 percent and that is quite an encouraging sign. Similarly we have been able to segment market into small-small niches, which are showing growth. For example, we try to find out customers who do not drive their car much, so for them petrol is a good option. So, we are doing lot of small-small things, which is helping us in increasing market share. However, the going is tough.
Q: Two production shutdowns in the last couple of weeks. Do you think that is going to be the trend for companies like you and your peers? What is happening here is there an inventory choke up at the other end or you are just trying to stabilise processes in terms of production? A: Principally, we do not believe that it makes any sense to push the metal unless it is followed by good retail, we try to control inventory by stocking production. To give some numbers, 2010 was the year when maximum numbers of petrol cars were sold in our country, that total number was around 1.6 million. This year our estimate is April-March total industry will sell about 1.1 million petrol vehicles. That means almost half million capacity is lying vacant, about 30-31 percent and this is true for all manufacturers. So, instead of pushing the metal to dealers and lying there, we think it is better and more prudent to cut production and manage inventories. _PAGEBREAK_ Q: How challenged is the pricing environment because of the kind of poor off take that you are seeing in terms of either giving discounts or inability to pass or price products higher during the course of this year, which might have margin implications for you? A: This time the customer is there at a particular price, so if you increase price, the customer just disappears. Discounts are at almost all time high; in fact I would tell customers to buy now. This is about the highest peak of what we have seen in discount level across last four-five years. So, certainly there is definitely pressure on bottomline margins. Q: What is the way around it? It is true that you have gained some market share but are you going to during the course of the year attack SUV segment with more gusto because that seems like the only space, which has some growth growing? A: Many things are going for us. One is we have been able to increase our diesel supply. Two years back it was around 20 percent of our total portfolio, now it is 38 percent. This year we will commission our diesel plant, which will increase our diesel capacity. So, this is responding to what market needs. SUV, last year we launched Ertiga, which is the largest car in this segment already. Going forward yes, we will have to do more in that direction. Product launches is a process of around 48 months. It is not that if we think today and we can launch product tomorrow. However, what is working for us is our marketing strategy, which we adopted; identifying different segments. Instead of doing mass marketing, we go marketing for one, identify small niches, offer them product, which customer need and as I told you earlier some of these markets are growing at almost 18-20 percent. Of course we launched new cars; in fact Ertiga is the largest selling car in this segment. Interestingly, despite these tough times we launched the new Alto 800 on October 16 and within four months we have been able to notch more than 100,000 vehicles in this category. So, a new product launch is another strategy that could engage customers and increase sales. Q: In the last six-seven years, two-wheelers and commercial vehicle makers both have been through this kind of cycles where demand has dipped considerably and then turned around. Passenger vehicle had a much smoother run over the last couple of years. Have you seen a phase like this? In your own experience how long does it take for demand trends to turnaround again? A: Car industry faced similar phase in 2008 and it was a very tough time. I have seen that in two-three years time the markets turned around but as market leader instead of waiting for things to turn, we will have to do lot of things to turn it around and that is what we are seeing this time. It is little comfort that we have done better than the market but the fact is that we have done than the market, gaining market share in tough times. So, we will have to expand the market. In 2008, when the real slowdown was there, that is when we started our whole rural marketing game. When we go for our market visit etc, we found that while sentiments in the bigger towns was bad but in smaller town people were okay and fortunately they do not read the economic press so they were happy. We developed a rural marketing strategy. In 2008, only 4 percent of our sales were coming from rural market, today it is 28 percent. That is quite a jump. Similarly we are working today on almost 92 small niche markets, which around 15,000 vehicles we sell every month in these niche markets and 15,000 in this industry is a big number.